FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 1997
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period
from ____________ to ______________
Commission file number 33-62674
GREAT NORTHERN INSURED ANNUITY CORPORATION
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(Exact name of registrant as specified in its charter)
Washington 91-1127115
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation)
Two Union Square, Suite 5600
Seattle, Washington 98101
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(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (206) 625-1755
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
The registrant meets the conditions set forth in general instructions H(1) (a)
and (b) of Form 10-Q and is therefore filing this form with the reduced
disclosure format.
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TABLE OF CONTENTS
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.............................................................. 3
Item 2. Management's Discussion and Analysis of Results of Operations..................... 8
PART II - OTHER INFORMATION
Item 1. Legal Proceedings................................................................. 10
Item 2. Changes in Securities............................................................. 10
Item 3. Defaults Upon Senior Securities................................................... 10
Item 4. Submission of Matters to a Vote of Security Holders............................... 10
Item 5. Other Information................................................................. 10
Item 6. Exhibits and Reports on Form 8-K.................................................. 10
SIGNATURES 11
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GREAT NORTHERN INSURED ANNUITY CORPORATION
Balance Sheets
(Dollar amounts in millions)
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June 30, December 31,
1997 1996
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(Unaudited)
Assets
Investments:
Fixed maturities $ 5,255.9 $ 5,270.1
Mortgage loans, net 1,130.7 1,159.7
Short-term investments 8.5 3.9
Other invested assets 175.5 165.0
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Total investments 6,570.6 6,598.7
Cash 10.0 2.3
Accrued investment income 113.3 112.2
Deferred acquisition costs 136.1 129.6
Intangible assets 163.8 181.0
Deferred income tax benefit 24.1 19.1
Other assets 70.8 44.4
Separate account assets 37.9 32.7
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Total assets $ 7,126.6 $ 7,120.0
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Liabilities and Shareholder's
Interest
Liabilities:
Future annuity and contract benefits $ 6,130.0 $ 6,171.9
Other policyholder liabilities 24.9 48.1
Accounts payable and accrued expenses 212.1 177.4
Separate account liabilities 37.9 32.7
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Total liabilities 6,404.9 6,430.1
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Shareholder's interest:
Common stock 2.5 2.5
Additional paid-in capital 542.0 542.0
Net unrealized investment gains 7.5 7.0
Retained earnings 169.7 138.4
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Total shareholder's interest 721.7 689.9
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Total liabilities and shareholder's interest $ 7,126.6 $ 7,120.0
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See accompanying notes to financial statements.
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GREAT NORTHERN INSURED ANNUITY CORPORATION
Statements of Income and Retained Earnings
(Unaudited)
(Dollar amounts in millions)
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For the three months For the six
ended months ended
June 30 June 30
1997 1996 1997 1996
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Revenues:
Net investment income $ 119.1 $ 113.2 $ 239.0 $ 226.5
Net realized investment gains (losses) (1.8) .6 6.6 2.1
Premiums 22.3 43.1 50.7 83.9
Surrender fee and other income 2.2 2.1 4.6 4.0
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Total revenues 141.8 159.0 300.9 316.5
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Benefits and expenses:
Interest credited 73.0 72.6 147.5 146.0
Increase in policy reserves 21.1 43.7 50.2 85.5
Annuity and policy benefits 9.8 6.8 18.6 12.8
Commissions 6.0 6.8 10.9 11.4
General expenses 8.2 9.9 17.9 20.3
Amortization of intangibles, net 7.6 9.9 16.7 21.3
Increase in deferred acquisition costs, net (4.3) (7.3) (7.8) (10.3)
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Total benefits and expenses 121.4 142.4 254.0 287.0
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Income before income taxes 20.4 16.6 46.9 29.5
Provision for income taxes 6.7 5.6 15.6 9.7
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Net income 13.7 11.0 31.3 19.8
Retained earnings at beginning of period 156.0 96.1 138.4 87.3
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Retained earnings at end of period $ 169.7 $ 107.1 $ 169.7 $ 107.1
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See accompanying notes to financial statements.
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GREAT NORTHERN INSURED ANNUITY CORPORATION
Statements of Cash Flows
(Unaudited)
(Dollar amounts in millions)
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Six months ended
June 30
1997 1996
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Cash flows from operating activities:
Net income $ 31.3 $ 19.8
Adjustments to reconcile net income to net cash provided by operating
activities:
Equity in undistributed earnings of subsidiary (3.9) (3.1)
Increase in future policy benefits 197.7 231.5
Net realized investment gains (6.6) (2.1)
Amortization of investment premiums and discounts 8.0 16.0
Amortization of intangibles, net 16.7 21.3
Deferred income tax (benefit) expense (5.3) (5.6)
Change in certain assets and liabilities:
Decrease (increase) in:
Accrued investment income (1.1) (23.5)
Deferred acquisition costs (7.8) (10.3)
Other assets (26.4) (25.6)
Increase (decrease) in:
Other policyholder liabilities (23.2) 42.1
Accounts payable and accrued expenses 34.7 45.2
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Total adjustments 182.8 285.9
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Net cash provided by operating activities 214.1 305.7
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Cash flows from investing activities:
Proceeds from investments in fixed maturities and real estate 559.2 364.3
Principal collected on mortgage and policy loans 81.5 76.1
Purchases of fixed maturities (549.6) (455.4)
Mortgage loan originations (53.3) (21.3)
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Net cash used in investing activities 37.8 (36.3)
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Cash flows from financing activities:
Proceeds from issue of investment contracts 179.6 171.8
Redemption and benefit payments on investment contracts (419.2) (412.7)
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Net cash used in financing activities (239.6) (240.9)
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Net increase in cash and cash equivalents 12.3 28.5
Cash and cash equivalents at beginning of period 6.2 30.0
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Cash and cash equivalents at end of period $ 18.5 $ 58.5
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See accompanying notes to financial statements.
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GREAT NORTHERN INSURED ANNUITY CORPORATION
Notes to Financial Statements
June 30, 1997
(Unaudited)
(1) Basis of Presentation
Great Northern Insured Annuity Corporation (GNA or the Company) was
incorporated as a stock life insurance company organized under the laws
of the state of Washington on June 4, 1980 and began writing business
pursuant to licensing on October 15, 1980. On June 30, 1983, The
Weyerhaeuser Company (Weyerhaeuser) acquired a controlling interest in
GNA.
Pursuant to a Stock Purchase Agreement dated January 5, 1993, by and
between Weyerhaeuser and General Electric Capital Corporation (GE
Capital), 100% of the outstanding capital stock of GNA Corporation was
sold to GE Capital effective April 1, 1993. The Company was a 100%
owned subsidiary of GNA Corporation at the date of acquisition.
Effective July 14, 1993, GE Capital acquired 100% of the issued and
outstanding capital stock of United Pacific Life Insurance Company
(United Pacific Life). GE Capital transferred controlling ownership of
United Pacific Life to GNA. Subsequently, United Pacific Life's name was
changed to General Electric Capital Assurance Company (GE Capital
Assurance).
Effective October 1, 1995, GNA was party to a reorganization involving
GNA Corporation and certain of its life insurance company subsidiaries.
As part of the reorganization, GNA became a wholly-owned subsidiary of GE
Capital Assurance, and GE Capital Assurance became a wholly- owned
subsidiary of GNA Corporation. Previously, all of GE Capital Assurance's
voting common stock was owned by GNA. The reorganization allows all life
insurance company subsidiaries of GNA Corporation to file a consolidated
federal tax return.
The accompanying financial statements include the accounts of GNA, as
well as its 48% investment in GE Capital Life Assurance Company of New
York (GE Capital Life of New York), accounted for under the equity
method.
The quarterly financial statements are unaudited. These statements
include all adjustments (consisting of normal recurring accruals)
considered necessary by management to present a fair statement of the
results of operations, financial position and cash flows. The results
reported in these financial statements should not be regarded as
necessarily indicative of results that may be expected for the entire
year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts and related disclosures. Actual
results could differ from those estimates.
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(2) Commitment and Contingencies
As of June 30, 1997 and December 31, 1996, the Company was committed
to fund $100.2 million and $27.7 million, respectively, in mortgage
loans.
There is no material pending litigation to which the Company is a party
or of which any of the Company's property is the subject, and there are
no legal proceedings contemplated by any governmental authorities against
the Company of which management has any knowledge.
(3) New Accounting Standard
The Company has adopted Statement of Financial Accounting Standards
(SFAS) No. 125, Accounting for Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities. Among other things, the new
statement distinguishes transfers of financial assets that are sales from
transfers that are secured borrowings, based on control of the
transferred assets. SFAS No. 125 is effective for all transfers of
financial assets occurring after December 31, 1996. The adoption of this
standard did not have an effect on the financial position or results of
operations of the Company.
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Item 2. Management's Discussion and Analysis of Results of Operations
RESULTS OF OPERATIONS
GNA's results of operations for the six months ended June 30, 1997 and 1996
include the accounts of GNA, as well as its investment in GE Capital Life of New
York, accounted for under the equity method.
Net investment income increased $12.5 million to $239.0 million during the first
six months of 1997 compared to 1996. This increase is primarily attributable to
purchase of higher yield securities, dividends from other invested assets and an
increase in average investments during the period.
Net realized investment gains/losses - Net realized investment gains were $6.6
million during the first six months of 1997, compared to a $2.1 million gain
during the same period in 1996. This increase is related to the Company's
asset/liability risk management and varies with market and economic conditions.
Premiums decreased $33.2 million to $50.7 million during the first six months of
1997. This decrease is due to lower sales of life contingent structured
settlement product primarily related to a shift in marketing focus to GE Capital
Assurance products.
Interest credited on policyholder deposits increased $1.5 million to $147.5
million for the first six months of 1997 due to an increase in interest
crediting rates.
Change in policy reserves decreased $35.3 million to $50.2 million during the
first six months of 1997. Policy reserves decreased largely due to a reduction
in sales of life contingent structured settlement product and reserve reduction
associated with the payout of benefits.
Annuity and surrender benefits increased $5.8 million to $18.6 million primarily
due to benefit payments on life contingent structured settlement product.
Commissions decreased $0.5 million to $10.9 million. This slight decrease is
due to normal sales volume fluctuations.
General expenses decreased $2.4 million to $17.9 million for the first six
months of 1997. Decrease is due to the Company's continuing cost reduction
strategy.
Amortization of intangibles (net) decreased $4.6 million to $16.7 million. The
Company established goodwill and present value of future profits assets in
connection with GNA's acquisition. The decrease is primarily related to lower
PVFP amortization for the period ended June 30, 1997.
Increase in deferred acquisition costs decreased $2.5 million as a result of
lower non-commission acquisition costs.
INVESTMENTS
Fixed Maturities. The Company's fixed maturities must be invested in accordance
with requirements of applicable state laws and regulations regarding the nature
and quality of investments that may be made by life insurance companies and the
percentage of assets that may be held in certain types of investments. At June
30, 1997, approximately 60.3% of fixed maturity investments were in corporate
issues and US Treasury notes and another 35.8% in securities backed by
residential mortgages. Approximately 78.7% of the fixed maturities portfolio
(excluding mortgage backed securities) is expected to mature within 10 years.
Approximately 38.2%, 24.0%, and 17.2% of the portfolio were concentrated in the
government, manufacturing, and financial industries, respectively. As of June
30, 1997, 0.7% of the Company's diversified portfolio was rated below investment
grade and no bonds were in default as to interest or principal.
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Item 2. Management's Discussion and Analysis of Results of Operations
(Continued)
All of the Company's fixed maturities were designated as available-for-sale at
June 30, 1997 and December 31, 1996. Unrealized gains and losses, net of the
effects on present value of future profits, deferred acquisition costs, deferred
taxes and investment in GE Capital Life of New York have been included in
shareholder's interest as of June 30, 1997. Shareholder's interest included net
unrealized gains of $7.5 and $7.0 million at June 30, 1997 and December 31,
1996, respectively, a difference primarily due to an increase in the fair value
of fixed maturities, principally resulting from lower market interest rates.
Mortgage Loans. At June 30, 1997, the mortgage loan portfolio consisted of 990
first mortgage loans on commercial real estate properties. The loans, which were
originated through a network of mortgage bankers, were made only on completed
leased properties and have a maximum loan-to-value-ratio of 75% at the date of
origination. The Company does not engage in construction lending or land loans.
The Company originated $20.2 of mortgages secured by real estate in California,
which represents 38.2% of total originations for the period ended June 30, 1997.
At June 30, 1997, the Company held $426.5 in mortgages secured by real estate in
California; this is 36.0% of the total mortgage portfolio as of June 30, 1997.
"Impaired loans" are defined by generally accepted accounting principles as
loans for which it is probable that the lender will be unable to collect all
amounts due according to terms of the original contractual terms of the loan
agreement. That definition excludes, among other things, leases, or large groups
of smaller-balance homogeneous loans, and therefore applies principally to GNA's
mortgage loans.
At June 30, 1997, impaired loans amounted to $8.1. The carrying amount has been
reduced previously through charge-offs or deferral of income recognition and
does not require an allowance for losses. Average investment during 1997 is
$12.3 and interest income earned on these loans while they were considered
impaired was $0.5.
Real Estate Owned. All real estate holdings are a result of mortgage loan
foreclosure. Properties are currently reported at the lower of cost or fair
value less estimated cost to sell. At June 30, 1997, the Company holds five
properties, valued at $2.4 million, for which management intends to market in an
orderly fashion to maximize their value.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not involved in any material pending legal
proceedings.
Item 2. Changes in Securities
Omitted.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
Omitted.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GREAT NORTHERN INSURED ANNUITY CORPORATION
(Registrant)
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By
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Date Thomas W. Casey, Vice President, Chief Financial Officer
(Principal Financial Officer)
By
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Date Stephen N. DeVos, Vice President and Controller
(Principal Accounting Officer)
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
[****CUSTOMER PLEASE FILL IN] AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE <<<<<<<CUSTOMER PLEASE FILL IN
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
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<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> JUN-30-1997 JUN-30-1996
<DEBT-HELD-FOR-SALE> 5,256 4,982
<DEBT-CARRYING-VALUE> 0 0
<DEBT-MARKET-VALUE> 0 0
<EQUITIES> 0 0
<MORTGAGE> 1,131 1,227
<REAL-ESTATE> 0 0
<TOTAL-INVEST> 6,571 6,421
<CASH> 19 59
<RECOVER-REINSURE> 0 0
<DEFERRED-ACQUISITION> 136 123
<TOTAL-ASSETS> 7,127 6,991
<POLICY-LOSSES> 6,130 6,058
<UNEARNED-PREMIUMS> 0 0
<POLICY-OTHER> 25 116
<POLICY-HOLDER-FUNDS> 0 0
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0 0
0 0
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<TOTAL-LIABILITY-AND-EQUITY> 7,127 6,991
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<INVESTMENT-INCOME> 239 227
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<OTHER-INCOME> 5 4
<BENEFITS> 19 13
<UNDERWRITING-AMORTIZATION> (8) (10)
<UNDERWRITING-OTHER> 29 32
<INCOME-PRETAX> 47 30
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<INCOME-CONTINUING> 31 20
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